New York Markets After Hours

Fund fee battle takes another twist

Vanguard acts in face of attack on low-cost index funds

By

JohnSpence

BOSTON (MarketWatch) -- In the latest skirmish with one of its biggest rivals over mutual-fund fees, Vanguard Group fired a new salvo on Thursday by lowering the bar for entry into the firm's low-cost share classes.

Although Vanguard denied that it was responding to recent fee cuts by Fidelity Investments and other big competitors, industry observers called the move an attempt to defend its role as the leading bargain provider of mutual funds.

In March, Fidelity said it was permanently lowering fees on several of its index funds, undercutting the expense ratios at comparable Vanguard Investor Share class funds. The move was seen as a clear challenge to Vanguard, best known for its stable of low-cost index funds.

Now Vanguard plans to reduce the account balance requirements in more than 60 of its mutual funds that offer Admiral Shares, effective May 10.

Vanguard started offering Admiral Shares in 2000 to reflect economies of scale at larger and long-standing accounts. For example, in the $103 billion Vanguard S&P 500 Index fund, the Admiral Share class
VFIAX, +1.23%
has an expense ratio of 0.09%, while the Investor Shares
VFINX, +1.23%
levy 0.18%.

Under the new requirements, investors with a fund account balance of at least $100,000 will be eligible for the cheaper share class. Previously, the minimum was $250,000, or $150,000 for accounts at least three years old.

Since 2000, accounts of $50,000 that have been in existence for 10 years also qualify for Admiral Shares.

"We have been dedicated to sharing economies of scale with our shareholders," said Jack Brennan, Vanguard's chairman, in a written statement. "Admiral Shares represent an innovative way to deliver tremendous costs savings directly to those shareholders who help to generate them."

Vanguard said it expects that several hundred thousand shareholder accounts will be eligible for Admiral Shares as a result of the move.

The Valley Forge, Pa.-based fund firm said it will automatically convert accounts of $100,000 or more to the lower-cost share class starting in July, although shareholders can make the switch before then.

Vanguard said it will add Admiral Shares to the $8.6 billion Vanguard Inflation-Protected Securities fund
VIPSX, -0.30%
in June, bringing the total to 64 portfolios offering the share class.

In recent years several fund families have lowered fees, in some cases due to settlements with regulators over improper trading at the expense of long-term shareholders.

Much of the voluntary activity has centered on index funds, with Vanguard, Fidelity, E-Trade Financial and USAA Investment Management all sending fees lower.

In March, Vanguard knocked down the expense ratios at several exchange-traded funds in its Vipers lineup to reflect asset growth. ETFs are indexed baskets of securities that trade on an exchange like a stock.

Passively-managed index funds are seen as a commodity product with little to choose among them aside from cost because they track a benchmark.

In an interview earlier this year posted on Vanguard's Web site, when asked about index-fund fee waivers by competitors, Brennan called them a marketing ploy. Fidelity promptly responded by making its fee cuts permanent.

Vanguard spokesman John Woerth said Thursday's announcement was not sparked by Fidelity's expense reductions, noting the move affects the firm's active, stock and bond funds as well as the index funds.

"We've had Admiral Shares since 2000 and this is just an extension of what Vanguard has done all along with sharing economies of scale with our investors," Woerth said. "It's just another step in tweaking the program to make it simpler and broadening it out to more shareholders."

Yet Morningstar analyst Jeff Ptak said "it's tough to see how Vanguard's move wasn't at least in part motivated by the Fidelity fee cuts."

Meanwhile, Jim Lowell, editor of the Fidelity Investor newsletter, criticized Vanguard, saying it is "letting the little guy not only shoulder a fee burden that's nearly twice as much as rival Fidelity index funds, but also helps prop up the Admiral Share class."

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